With the recent upswing in homes values we have realized a growth in equity as well. This leaves many owners thinking that they may be stuck in an investment property? Whether you bought it as an investment or it was an owner occupied that went past you 3 year deferment period you have options. Maybe you would prefer an investment in a different city, region or even another state? Possibly you would like to combine many properties into few or few into many? The answer is a 1031 Tax Exchanges otherwise known as a Starker Exchange. This process allows real estate owners to defer taxes on capital gains resulting from the sale of investment real estate, often a sizable sum since combined Federal and State taxes can run as high as 38 percent.
In general terms to roll their profit into another property and defer the tax and preserve equity and cash flow.
To accomplish this, sellers need to engage a Qualified 1031 Intermediary to document the sale as an exchange and to receive the funds from the sale. I cannot stress the importance of a third party for the exchange. This does not mean a title or escrow company. By definition you can not have any direct control over the funds, which is not just in your pocket but anywhere within your reach
Central to a 1031 Exchange is the interpretation of like-kind property. While the common assumption is that like-kind implies land for land or a condominium for a condominium swap, the definition of like kind has become far less literal. Today it defines like kind as meaning that both the replacement and the original property must be used as an investment. So land, condominiums, single-family homes and motels can all be exchanged for one another as long as they are used in the exchanger’s business or held as an investment.
1031 Exchanges do have specific IRS requirements and a set time frame for performing. This is why it is very important that you contact an experience agent such as myself and engage the Intermediary BEFORE you close and ideally before you place the property for sale.
There are other options for example you can opt for a Reverse Exchange where you buy the replacement property first then sell the current property. An Improvement Exchange, allows you to build investment properties from the ground up or improve existing properties.
If you want more information on 1031 Exchange or have any questions feel free to contact myself or a real estate professional you know. Make sure that he or she is familiar not only with the process but also with the specific documentation and time frame mandated by the IRS.
This article is intended to inform readers, but does not constitute any financial or legal advice.
Patrick McCarran is a local Realtor/Broker and can be reached at (925) 899-5536 or www.CallPatrick.com. Berkshire Hathaway HomeServices Drysdale Properties an independently owned and operated franchisee of BHHS Affiliates, LLC. Equal Housing Opportunity.